China taking on U.S. dollar, forging ahead in digital payment

Trading of crude futures began in March at the Shanghai Futures Exchange. (Asahi Shimbun file photo)

While China has made major strides in catching up with the United States in terms of economic power, it still lags far behind in finance.

In various ways, the dollar still reigns supreme over the yuan. However, that is not stopping China from carving out new sectors of influence in digital technology and artificial intelligence.

The fact that China has made developments in the digital field as well as AI opens up the possibility that it can establish its own China standard in the financial world in a matter of a few years.

CHALLENGING DOLLAR DOMINANCE

China became the world's leading importer of petroleum in 2017, leapfrogging the United States. But government officials are still frustrated that the U.S. dollar determines to a large extent the price of crude oil.

To get around that problem, the Shanghai Futures Exchange in March 2018 began a pioneering effort to deal in crude oil futures denominated in yuan.

The move was an attempt to chip away at the huge influence on crude futures played by the exchanges in New York and London.

The effort to take the initiative in setting crude prices was explained by Jiang Yang, the former vice chair of the China Securities Regulatory Commission, who said, "(Westerners) are determining (the price) of our petroleum."

Allowing for crude payments in yuan would move China toward that goal. Since its start, trading volume on the Shanghai Futures Exchange for crude oil has been increasing.

However, the path is still a long one for the yuan since it is only used in 1.3 percent of all trade in the world, while the dollar dominates with a usage ratio of 42.8 percent.

In addition to the futures exchange, China is also making other moves to get around the United States.

A major focus has been the economic sanctions imposed by the Trump administration on Iran. Despite the resistance put up in Iran as well as the concerns raised in the global community, the United States in November slapped sanctions on petroleum exports, which account for about 60 percent of Iran's revenues. Those sanctions extended to all companies that had business dealings with Iran and threatened to shut out foreign companies from the U.S. financial market, meaning isolation in the global economy.

While Japan and Western nations began rethinking their approach to Iran, China actually moved closer to Iran, in part because it is the largest importer of petroleum from Iran.

After the United States implemented the sanctions, a Chinese Foreign Ministry spokesperson defended Iran and said, "We oppose any unilateral sanctions."

An Iranian government source said, "If we use the yuan, we can settle our trading without going through the U.S. financial system."

Ali Haji, a former Iranian ambassador to China, told a Chinese newspaper that some payments for Iranian petroleum had been received in yuan and that the amount would likely increase in the future.

The U.S. pressure also applies to Chinese banks, but as one Iranian government source said, "China has so many financial institutions that the United States cannot keep tabs on all of them. All we have to do is utilize those institutions."

While the scale may still be small, the yuan is increasingly becoming an alternative for serving as a loophole around U.S. sanctions.

CHINA EYING DIGITAL TECHNOLOGY

China is also making efforts to change the relationship between money and society through digital technology.

At a November conference in Singapore on fintech, the marriage of finance with information technology, Christine Lagarde, the managing director of the International Monetary Fund (IMF), said, "Money itself is changing."

Pointing to the advances of digitalization, she asked, "What role will remain for cash in this digital world? In 30 years, who will still be exchanging pieces of paper?"

As one example of what Lagarde described as "a new wind" changing the nature of currency, she listed Alipay, the smartphone payment system developed by the Alibaba Group of China.

Jack Ma, who heads Alibaba, was in Bali in October to participate in a discussion with Jim Yong Kim, the World Bank president, in the annual meeting jointly sponsored by the IMF and World Bank.

Ma stressed that while credit cards were created mainly for the affluent, smartphone payment systems, such as Alipay, can be used by anyone.

The simplicity of the Alipay system has created an almost cashless society in China seemingly overnight. All consumers have to do is run a product's bar code through their smartphones to have the amount paid to the retail outlet from their bank accounts.

But such payment systems also hold other potential because they accumulate Big Data about an individual's buying habits, movements and friends. Such systems mean, according to Lagarde, that "data is the 'new gold.' "

There is already a tug of war over who will gain the upper hand in collecting and using such Big Data. While the GAFA group of U.S. companies made up of Google, Apple, Facebook and Amazon is playing a leading role, concerns are also being raised in the United States over whether an iron-fisted nation such as China should be allowed to collect individual data on such a global scale.

In his discussion with Kim, Ma said that he was hated by both Europe and the United States and complained that they only talked about restrictions.

Perhaps realizing he will not likely get very far in the West, Ma has personally visited some of the newly emerging economies, such as Indonesia, Thailand, Singapore and India, to generate interest in the projects of his group.

According to several research companies, about 30 percent of the world's population, or between 2.5 billion and 3 billion, use smartphones. Those individuals are potential customers of online payment systems, even if they may never possess credit cards.

African nations are also showing an interest because such systems allow for tax collections from a large section of the population.

The World Bank has said that developing nations would serve as the game changer in how such systems eventually play out.

CHINA’S HUGE CRYPTOCURRENCY PRESENCE

While smartphone payment systems still go through the traditional financial systems, the world of cryptocurrencies may hold the potential of fundamentally altering the currency system supported by nation-states.

And in that world, China clearly already has a dominating presence.

In September 2015, a conference was held in Hong Kong related to Bitcoin.

Eight people were called to the stage and introduced as representing about 90 percent of the global ability to "mine" Bitcoin. Mining is the jargon for using computers to add transaction data that becomes what is known as the blockchain, the ledger for past transactions that have been verified by the miners. Miners earn Bitcoins as their reward for the often complex and painstaking work involved.

The eight individuals were all leaders of their own mining groups and five were Chinese. That number was a surprise to many in the cryptocurrency world because it is believed theoretically that any group that controls a majority of mining ability has the potential to be aware of all transactions and monopolize the hold on Bitcoins.

Concerns were raised that China would soon be in control of the cryptocurrency world.

Bitcoin was born in 2009 as a transaction system that would not be interfered with by nations. After the 2013 financial crisis in Cyprus, Bitcoin became more widely known as a way to move one's assets.

Chinese businesses were quick to latch onto the potential of cryptocurrencies, and they set up mining companies in inland areas of the nation where electricity costs were cheaper.

The future of cryptocurrencies appeared bleak when the Chinese government closed exchanges in the nation in September 2017 due to concerns the cryptocurrencies would lead to excessive speculation and the flow of funds out of the nation.

But the Chinese government did not go so far as to do away with the blockchain technology that serves as the core of cryptocurrencies.

The People's Bank of China in October began recruiting staff for a research institute it set up to look into digital currency. While there is still much not known about what the institute will do, its head, Yao Qian, said, "Steady progress is being made in search of a legal digital currency."

That leads to conjecture that the institute is striving to bring about a digital yuan.

(This article was written by Naoyuki Fukuda in Shanghai, Shinya Sugizaki in Teheran, Hidefumi Nogami in Bali and Ryo Inoue in Tokyo.)